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The Attorney General Goes to War
By:
James Traub
A few years ago, Eliot L. Spitzer, the attorney general
of New York and a Democrat, was invited to speak before the Federalist
Society, the legal group whose members abhor the use of courts to force
political change -- at least liberal political change -- and have helped
formulate the key conservative tenet that power should devolve from the
central government, including the federal courts, to the states. ''I told
them that I had had an epiphany and I was now a fervent Federalist,''
Spitzer said. ''Having won this job as attorney general of a state, this
devolution of power was a wonderful thing: they were limiting the feds, they
were shifting to us, so we could go off and sue the tobacco companies.''
Spitzer claims that his audience was ''ashen.'' This seems unlikely, but
melodrama is so foreign to Spitzer's nature that perhaps he can be permitted
this one moment of self-satisfied hyperbole.
We are, in fact, in the midst of an era of widespread state-level judicial
activism, and Eliot Spitzer is the most activist, or at least the most
prominent, attorney general around. Since being elected in 1998, at age 39,
Spitzer has expanded the scope of the office by using novel approaches to
the law in order to go after large-scale targets -- including gun
manufacturers, drug companies and Midwestern polluters -- often in concert
with other state attorneys general. He has won some and lost some. But
nothing Spitzer has done has remotely had the impact of the news conference
he held April 8, at which he announced that research analysts at Merrill
Lynch had published false and misleading stock recommendations, an act he
characterized as ''an outrageous betrayal of their trust and a shocking
abuse of the system.'' The dominoes haven't stopped falling since. In one giddy two-day period,
Harvey Pitt, the chairman of the Securities and Exchange Commission and a
stout believer in industry self-regulation, announced that he had changed
his mind and ordered an investigation of his own, and David Komansky, the
chairman of Merrill, which until that moment had furiously rejected the
allegations, publicly apologized for the deception. And then on May 21,
Spitzer announced that Merrill had agreed to pay a $100 million fine; to
issue a ''statement of contrition''; and to compensate its research analysts
''only for those activities and services intended to benefit Merrill Lynch
investor clients,'' rather than, as had been the case, according to how much
they helped the firm's investment-banking business. There is wide
disagreement on Wall Street about how profoundly the settlement will alter
the behavior of investment banks, but even Merrill's most staunch defenders,
like Edward Fleischman, a securities lawyer and former S.E.C. official, says
that Merrill and other companies are likely to change practices and policies
''because they want to be perceived by their clients as having their
clients' interests first and foremost.'' Spitzer has provoked fear -- and
some loathing -- on Wall Street. I first visited Spitzer in his office in downtown Manhattan a few weeks
after the news conference. He greeted me with a young man's bone-crushing
handshake. Spitzer is a kind of Dudley Do-Right character: earnest, a bit
stiff, with one of those unvaryingly deep voices that project precocious
moral authority. He has a forehead made prominent by a receding hairline and
a chin you could play pinochle on -- a granite, prosecutorial chin. For all
that, he gives the impression of being relatively equable -- a bit zealous,
perhaps, but not driven by the furies. ''He doesn't have the extra
chromosome,'' as a friend of his puts it. Spitzer was an editor of the law review at Harvard Law School, and he has
the talented law student's gift of sorting particulars into bright
categories. He listens to questions with the avidity of a tennis player
waiting to smash back a serve, and once he knows where you're going, he
starts muttering ''Right, right, right'' as he waits with diminishing
patience for you to finish. When I asked Spitzer whether the new states'
rights movement had in some sense made his investigation of Merrill
possible, he said, ''Let's disaggregate the pieces.'' Attorney general
activism, he said, probably has less to do with new legal doctrine or
judicial decision-making than with ''an emotional shift'' toward
deregulation and deconcentration of power that began under President Reagan
and has gathered force under George W. Bush. Spitzer quoted something else
he had said to the Federalists: ''Isn't it the case that there was no
ideological content to the pure notion of where the decisions are made?'' Of course there was; Spitzer and other attorneys general are filling a
void that was intended, by the anti-Washington right, to be filled by the
marketplace -- by, say, self-regulating Wall Street businesses -- not by
other legal actors like state A.G.'s. James Tierney, who teaches multistate
litigation at Columbia Law School and served for 10 years as the attorney
general of Maine, confirms Spitzer's view (and adds that the new activism
also has a great deal to do with the nationalization of the economy).
Tierney considers Spitzer's investigation of Merrill and other investment
banks a trailblazing action that will spur his colleagues elsewhere. ''Once
the attorneys general have entered a field,'' he says, ''they don't go
out.''
An attorney general who interprets his consumer-protection mandate
expansively can exercise a form of power that is almost more legislative
than judicial. I spent a morning watching Spitzer, and I was struck by how
explicitly he was seeking to forge, or at least shape, social policy. He
spent an hour preparing to argue an appeal in a case his office had brought
seeking to prevent gun manufacturers from distributing guns to retailers
that, in turn, made guns available to criminals -- a form of judicially
mandated gun control. (That Spitzer had decided to argue this extremely
difficult case himself illustrates the pleasure he takes in the intellectual
aspect of the law.) Spitzer had brought the case under the state's
public-nuisance laws; at the time, no court had ever agreed to apply such
laws to any consumer product, much less a gun. Indeed, no other state
attorney general had tried to sue gun manufacturers. The case, not
surprisingly, had been thrown out by a lower court. An assistant at the
meeting, playing the role of judge, suggested that it was federal
regulators, who monitor gun sales, that should be bringing the case.
Spitzer's answer was, in effect, ''They haven't.'' Later in the morning, Spitzer met with the head of his labor bureau to go
over a proposal for owners of produce stores to sign a code promising to pay
workers the minimum wage as well as extra wages for overtime -- in exchange
for which the owners would be exempt from future litigation. He discussed
with his chief deputies continuing negotiations with the owners of
Midwestern utilities he had sued under an untested provision of the federal
Clean Air Act. Spitzer argues that acid rain from the Midwest is drifting
into New York. Peter Lehner, head of the attorney general's environmental
protection bureau, reported that while the utilities no longer fear federal
action from the deregulators in the Bush administration, they were deeply
worried about the states. Spitzer smiled -- the expression of a man who
considers himself the Federalist Society's worst nightmare. And to hear the Federalists, he is. Walter Olson, a Federalist in good
standing, a senior fellow at the conservative Manhattan Institute and the
author of a book soon to be published on mass litigation, says that on guns,
''Spitzer wishes to second-guess the results of the democratic process.''
Olson says that the fact that Spitzer is asking a judge to impose penalties
on gun manufacturers -- including out-of-state gun manufacturers -- should
cause ''the mental alarms of all conservative federalists to start
ringing.'' Eliot Spitzer grew up in Riverdale, a wealthy enclave in the Bronx. His
mother was an English teacher and his father an engineer who made a fortune
in real estate. The family dinner table was the scene of high-minded debate.
The youngest of three children, Eliot was sent off to Horace Mann, a private
school consisting back then almost entirely of terribly serious,
intellectually combative well-to-do Jewish boys like himself. From there he
went to Princeton, where he continued to be high-minded, scholarly and
combative. Carl Mayer, a friend and classmate, says that he and Spitzer
specialized in ''intensely fierce competitions,'' whether in running,
tennis, basketball or even spaghetti-eating. As a freshman, he occasionally
commuted back to the Bronx in order to serve as treasurer of the Benjamin
Franklin Democratic Club. Though this was a time when student government enjoyed an extremely dim
reputation at Princeton, Spitzer ran for student-body president in his
sophomore year and won. He took the job very seriously and did it very well.
There is a widespread view among Spitzer's old friends that politics was
always his destiny. Spitzer, however, sees himself in a very different
light. The pattern, he says, was a passionate interest in government, in
service -- not in politics. He was thinking Cyrus Vance, not Mark Green. Spitzer went on to Harvard Law School and joined the Manhattan district
attorney's office in 1986. Michael Cherkasky, who was Spitzer's boss in the
labor-racketeering division, says that he recognized the young man's
brilliance and ''fast tracked'' him. Spitzer masterminded one of the
best-known cases of his time, an investigation into mob control of trucking
in the garment district; he conceived the idea of offering Thomas Gambino,
the chief suspect, a deal in which Gambino could avoid jail by agreeing to
plead guilty to a criminal offense, make a $12 million restitution and
promise to stay out of the business. Cherkasky describes it as an ingenious
solution and a ''creative use of law enforcement.'' Spitzer left the D.A.'s office in 1992 for the duly prestigious firm of
Skadden, Arps but found that he was bored by private practice. The reigning
attorney general, Robert Abrams, had stepped down after a run for the
Senate, and an election was coming up in 1994. It was an elective office,
but it was a legal office, and it had a wide ambit in social and economic
issues. Spitzer decided to run. He had no important backers, no ties to the
Democratic Party and no political skills. He would have been a laughable
candidate save for one thing: he was rich. Spitzer spent $4 million, which
buys a great deal of attention in a primary race for attorney general.
Spitzer ran as a pro-death-penalty, tough-on-crime Democrat, despite the
fact that A.G.'s have relatively little to do with criminal issues. He finished last in a field of four. But he almost immediately began
campaigning for the next election, slogging across the state and presenting
himself to county leaders, who were surprised to discover just how much this
rich Harvard boy wanted one of the state's least glamorous jobs. This time
around, he won the primary and beat the Republican incumbent, Dennis Vacco,
in a race so close that it took six weeks for Spitzer to be declared the
winner. The Merrill Case represents the convergence of a number of forces: the
new state-level activism, deregulation at the federal level and Spitzer's
own ambitious legal formulations and flair for public relations, a talent
common to all successful prosecutors, at least in New York. Spitzer's office
began its investigation last summer, and it chugged along uneventfully until
January, when Spitzer discovered the e-mail messages that Merrill Lynch's
analysts had been sending to one another and to the company's investment
bankers. Suddenly, he felt that he had not only proof of guilt but also a
mighty cudgel with which to beat the firm into submission. Those messages
have now joined Sherron Watkins's letter to Kenneth Lay warning of
accounting fraud at There is a curious difference, though, in that the authors of the e-mail
messages plainly felt that they were engaging in conventional, if possibly
unfair, behavior. The routine behavior was using stock recommendations as a
marketing device to attract investment-banking business rather than as an
analytical tool for investors, though the bank publicly represented the
research as just such a tool. A ringingly positive recommendation from a
celebrity analyst could do wonders for a client's stock offering, though of
course it would mislead the naive investor. What made the e-mail messages so
powerful is that they often caught the analysts at moments of bad
conscience, as when, most famously, Henry Blodget, Merrill's celebrated
Internet analyst, threatened that he would no longer ''cut companies any
slack'' and thus that ''we are going to just start calling the stocks . . .
like we see them, no matter what the ancillary business consequences are.'' Spitzer's release of those explosive documents had precisely the effect
he had calculated -- they created public outrage. Merrill's initial response
was that the e-mail messages had been taken out of context and that the
charges demonstrated ''a fundamental lack of understanding of how securities
research works within the overall capital-raising process.'' When I first
contacted Merrill, an official promised to put together a group of bankers
to defend the company's position for me. But that meeting never came off.
Merrill's stock lost $9 billion in value in the wake of the release of the
e-mail messages, and the company gave up the fight. The reaction on much of Wall Street and in the business press was that
Merrill had done nothing that merited state intervention and that Spitzer
had essentially blackmailed the company into submission. An editorial in
Barron's argued that ''half-wit speculators'' who purchase risky stocks on
analysts' recommendations don't deserve legal protection and that Spitzer
was trampling on the First Amendment rights of the analysts. Spitzer's
answer was that most investors did not, in fact, understand that the
analysts' recommendations were rigged, and, as he says, ''I've got a job,
and it's to protect small investors.'' It is also true that the regulation of the stock exchange has
traditionally been left to the exchange itself and to the S.E.C. But Spitzer
argued that the regulators had failed to pursue or even recognize the
inherent conflict he had uncovered, and he seized on a state securities law,
the Martin Act, that had been used in the past to pursue boiler-room
operations and Ponzi schemes. Spitzer initially hoped to force Merrill to build a sort of church-state
wall between the research and banking sides but backed off when Wall Street
figures explained that research could not survive without being subsidized
by banking. Spitzer continued to maintain, however, that he had to eliminate
the incentives for analysts to cook their recommendations, and so the
agreement he reached with Merrill not only spells out the activities for
which analysts can and cannot be compensated but also establishes a
''Research Recommendation Committee'' to embed these new rules in the firm's
daily decision-making. Financial authorities are not altogether persuaded that even these
measures will change so deep-seated a system. John Coffee, a professor at
Columbia Law School and an expert on financial law, says, ''I think at the
margin it does represent significant reform,'' but adds, ''Analysts are
still going to be partly a neutral umpire and partly a securities
salesman.'' Coffee also notes, ''For those people who were screaming about
how reckless Spitzer was, I think the industry, and Merrill specifically,
can thank its lucky stars, because he had it in his power to crucify them.''
In exchange for reaching a final settlement with Merrill, Spitzer has
forgone the opportunity to put Blodget and others under oath for the
equivalent of public grand jury testimony. Nevertheless, he has extended his
investigation to virtually all the major Wall Street banks, and Merrill's
competitors are now on notice about the price they may have to pay to avoid
a fate worse than Merrill's. A recent Op-Ed in The Wall Street Journal suggested that Spitzer had
taken on Merrill for the same reason Rudy Giuliani had supposedly targeted
insider trading -- to ''further his own career.'' Spitzer of course denies
the allegation, but you cannot hurt your political standing by crusading
against Wall Street at a time when millions of Americans want someone to
blame for the evaporation of a chunk of their assets. (Spitzer's position is
considered so impregnable that the Republicans have put up a virtually
unknown judge to oppose him this fall -- an indubitable proof of political
success.) Democratic officials do, in fact, view Spitzer as their very own Giuliani
-- a prosecutor who wants to go far, and will. According to a vision of
Spitzer's future now floating around New York Democratic political circles,
this fall the Republican governor, George Pataki, will beat either Andrew
Cuomo or Carl McCall, who are seeking the Democratic nomination, and then
retire at the end of his third term. And in 2006, as one ranking Democrat
puts it, ''it's going to be King Kong vs. Godzilla'' -- Spitzer vs. Cuomo
for the Democratic nomination. ''Look for Eliot and Andrew to be always
positioning themselves against each other in regard to 2006,'' he adds. Hank
Sheinkopf, who was Spitzer's media consultant in the 1998 campaign, says:
''He brings the right side and the left side of the Democratic Party
spectrum in one place. He's a tough competitor, extraordinarily smart, and
who knows where he'll end up?'' Spitzer still does not consider himself any kind of politician. In his
own mind, he is the same thing he has always been: a public-spirited lawyer.
''I'm not really suited for other kinds of office,'' he told me. I asked if he meant that the rumors about 2006 were baseless. Spitzer saw
that he had made a misstep, and a pained grin twisted his long jaw. He
paused -- even a short pause feels long with Spitzer -- and then said
mechanically, ''The only position I'm thinking about running for now is
re-election.'' FAIR USE NOTICE: This page contains copyrighted material the use of which has not been specifically authorized by the copyright owner. Global Action on Aging distributes this material without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes. We believe this constitutes a fair use of any such copyrighted material as provided for in 17 U.S.C § 107. If you wish to use copyrighted material from this site for purposes of your own that go beyond fair use, you must obtain permission from the copyright owner.
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